mdlake.net

In the media circus surrounding not-at-all-gay Senator Craig’s restroom hijinks last week, we nearly missed something that strikes me as important, even ominous. The White House came out with its policies on what to do to alleviate the recent melt-down in the housing market: nothing. Somewhere down on page ten, or forty-five minutes into an hour news show, we could learn of Bush’s expression of belief that “lenders have a responsibility to help these good people … to stay in their homes,” but no actual call that that responsibility be enforced. Bush positively refused to bail anyone out of their own bad decisions.

This is not to say Mr. Bush will sit idly by and do nothing at all, however. The homeowners’ loss is his gain.

In an interview with NPR, Secretary of State Henry Paulson elaborated on Bush’s speech. The White House will not ask that Congress help the homeowners directly, or in any substantial way; that would be expensive, and would not enrich our leaders in Washington. It will, however, ask Congress to fight the housing crash indirectly, through—what else?—tax cuts.

Paulson explained that the president and his cabinet “hope to do away with a perverse aspect of the tax code,” by which forgiven loans are considered income. If a bank forgives a bad house loan, the homeowner must treat that loan as income, a portion of which would have to be paid as income tax. Paulson argued that removing forgiven loans from the income category would therefore ease the burden on homeowners hoping for some kind of debt relief.

Think about this. The new law would only benefit homeowners if and when their debts were forgiven. The power to forgive or refinance loans lies with the lender, not with the borrowers, who would love to have their debts forgiven, even if it means paying a fraction of that in taxes. The new law would do nothing to encourage lenders to forgive or refinance loans, because they would still stand to gain nothing from forgiving debts. The proposal only makes sense if we believe that banks are refusing to refinance out of concern for the homeowners’ taxes (in itself grossly implausible) while simultaneously remaining indifferent to the homeowners’ total wealth.

No, rewriting the tax code so that forgiven loans no longer be considered income will not help the “good people” about to lose their homes one whit. So who would it help? Hm… let’s think about this some more.

Ah, yes. That would be anyone who receives a large loan under conditions where repayment is not expected. If the laws were rewritten, CEOs and other fat cats with the savvy to do so (or salaries large enough to justify hiring a lawyer to do it for them) could receive their income as loans which are immediately forgiven. No taxes. Done. Presumably, those of us who receive our income via paycheck would be expected to pick up the slack. The laws Paulson calls perverse are in fact entirely straightforward and reasonable. I’d want to call the proposed changes “the billionaire’s law” as a way to turn public sentiment against it, if we didn’t already have a sheaf of such laws.

Perhaps a different label would serve us better. Someone else already uses large loans without expectation of repayment.

I call your attention specifically to the way unsecured, unrepaid loans are a popular way to offer bribes even as the tax code stands now. If you get caught at it, it’s easier to claim “Yes, we financed the Senator’s new mansion, but we expected him to repay the loan someday, so no value actually changed hands” than to admit “Yeah, we bought him a mansion. So what?” Restructuring the law would mean that this abuse of financing wouldn’t even need to be declared. The new mansion wasn’t bought for me, says the senator, I paid for it with a loan. Yes, admittedly, that loan was never repaid. But it’s not income, so I don’t need to claim it in my tax return. Changing the law would obliterate, or at least go a long way toward obscuring, the paper trails huge bribes leave behind.

Call Paulson’s proposal the “Briber’s Bill.” I don’t think it is proposed primarily to make bribery easier; the real point is to create the biggest possible loophole for rich people who don’t like paying taxes. But we’ve had some hard lessons recently on how to label political issues according to how you want it perceived, rather than how it actually functions. Best of all, we don’t even have to stretch the truth. The proposed tax revision will aid bribery, and far more than it will help anyone in jeopardy of losing a home.